Taka­ful — How It All Started & Where It Is Now

From The Heart of Rosli­nah Daud

Taka­ful there­fore, is a noble con­cept that brings forth mu­tual co-op­er­a­tion amongst in­di­vid­u­als who get to­gether with the in­ten­tion to help one another in times of dif­fi­cul­ties. “Help one another in right­eous­ness and piety; but do not help one another in sin and trans­gres­sion.”

(Al-Maidah:2)

WHEN I WAS ASKED TO PRO­VIDE SOME AR­TI­CLES ON THE topic of taka­ful, I was a bit ap­pre­hen­sive as it is quite a daunt­ing task for me, al­beit be­ing in the in­dus­try for the past 20 years; but yet, I feel there is a need to share and to en­lighten on what taka­ful is all about. The con­cept of taka­ful is very close to my heart, hav­ing spent the whole of my ca­reer in this in­dus­try, from ac­tu­ar­ial to op­er­a­tions to mar­ket­ing of the prod­ucts and ser­vices. There­fore, with much hum­ble­ness, here I am, shar­ing my views, thoughts and ex­pe­ri­ence on the topic, which I hope will shed some light to those who seek to learn and to un­der­stand. In my se­ries of ar­ti­cles, I will share the un­der­ly­ing con­cept of taka­ful from its the­o­ret­i­cal as­pects to its prac­ti­cal as­pects and ev­ery­thing you need to know about taka­ful. So I hope. De­spite be­ing around for over a cen­tury, taka­ful is a term that is very much alien to many. Orig­i­nat­ing from pre-Is­lamic prac­tices among the Arab tribes, taka­ful came from an Ara­bic word “Al-Kafala” which means “guar­an­tee­ing one another”. What had hap­pened dur­ing those days were that the Arabs had this prac­tice of col­lect­ing money amongst them to help fel­low broth­ers who had killed another brother pay “blood money” to the fam­ily of the de­cease. This act was done to “save face” of the fam­ily of the person as well as the tribe he was in. It was also done to com­pen­sate the de­cease’s fam­ily for the loss of his fam­ily mem­ber. Taka­ful there­fore, is a noble con­cept that brings forth mu­tual co-op­er­a­tion amongst in­di­vid­u­als who get to­gether with the in­ten­tion to help one another in times of dif­fi­cul­ties. This is very much en­cour­aged in Is­lam, by virtue of the verse in the Qu­ran, Take note of the word “help”. Ac­cord­ing to Ox­ford Dic­tionary, help is de­fined as mak­ing it eas­ier or pos­si­ble for (some­one) to do some­thing by of­fer­ing them one’s ser­vices or re­sources. That is the true in­ten­tion of taka­ful. Now, how can “help” be trans­lated into its ac­tual mean­ing in the prac­tice of taka­ful? A taka­ful com­pany is set upon the ba­sis of ta’awun, an Ara­bic word which means help­ing one another. Sim­i­lar to the prac­tices of the Arab tribes, Taka­ful com­pa­nies there­fore help man­age a pool of money con­trib­uted by par­tic­i­pants. The money that is pooled is then used to help par­tic­i­pants and their fam­i­lies in the event of any mishaps. The only dif­fer­ence be­tween prac­tices of the olden days and now is per­haps, there is no killing or blood money in­volved, but the un­der­ly­ing con­cept re­mains the same – to help those in need. The ini­tial in­ten­tion is in­deed good, yes? But as of many things in these mod­ern days, this noble in­ten­tion of help­ing one another has trans­lated into busi­ness ven­tures and with that comes the el­e­ment of profit mak­ing - by both taka­ful op­er­a­tors and par­tic­i­pants. Thus, in ad­di­tion to help­ing par­tic­i­pants man­age their money, taka­ful op­er­a­tors need to gen­er­ate more money out of the par­tic­i­pants’ money to be able to ful­fil the ex­pec­ta­tions of the par­tic­i­pants of get­ting more out of their in­vest­ment.

Of course, there is no such thing as free lunch. In order to man­age the fund, taka­ful op­er­a­tors need to be paid too, as costs are in­curred to em­ploy staff, to build sys­tems to man­age the money and its in­vest­ments and most im­por­tantly to the share­hold­ers, it is a busi­ness ven­ture which needs to gen­er­ate profit and give re­turns for the money they have in­vested. Thus, the un­der­ly­ing con­cept of taka­ful has shifted from just help­ing one another in need, to profit-mak­ing. Don’t be mis­taken, I have no ob­jec­tion re­gard­ing profit-mak­ing. In my opinion, profit-mak­ing is not wrong as long as the un­der­ly­ing in­ten­tion and trust are ful­filled, the trans­ac­tions are trans­par­ent to stake­hold­ers and the man­age­ment of the com­pany and in­vest­ments of the fund are done ac­cord­ing to ways that do not con­tra­vene with the Shariah, i.e. the prin­ci­ples put forth to us by Al­lah through the Qu­ran, and all sup­port­ing prac­tices of the Ra­su­l­ul­lah through its sun­nah, i.e. his words and his deeds. How­ever, let us take a look at the cur­rent prac­tices in the in­dus­try. Be­cause taka­ful has be­come busi­ness ven­tures that are deemed to be prof­itable, many taka­ful com­pa­nies have emerged. With many play­ers in the mar­ket, nat­u­rally com­pe­ti­tion will ex­ist; as in order to prove its ex­is­tence and to gain mar­ket share, taka­ful op­er­a­tors will tend to com­pete among each other. Hence, prod­ucts are be­ing de­signed cre­atively and when prod­ucts are cre­ated, there comes a need to mar­ket or pro­mote them to at­tract masses to par­tic­i­pate through many dis­tri­bu­tion chan­nels; the most com­mon ones be­ing agency, banks, bro­kers and di­rect chan­nel. So now, taka­ful op­er­a­tors do not just need to man­age money be­long­ing to par­tic­i­pants as well as pro­vide help by pay­ing ben­e­fit upon any de­fined mishaps, they also need to en­sure prof­its are gen­er­ated for their stake­hold­ers and in

A taka­ful com­pany is set upon the ba­sis of ta’awun, an Ara­bic word which means help­ing one another. Com­pe­ti­tion among taka­ful op­er­a­tors ex­ists not re­al­iz­ing that in Is­lam, the em­pha­sis is on co­op­er­a­tion and not com­pe­ti­tion.

ad­di­tion, com­pete with not only non-shariah com­pli­ant in­sur­ance com­pa­nies but also other shariah com­pli­ant taka­ful op­er­a­tors. Com­pe­ti­tion among taka­ful op­er­a­tors ex­ists not re­al­iz­ing that in Is­lam, the em­pha­sis is on co­op­er­a­tion and not com­pe­ti­tion. The Qu­ran says,

“Then strive to­gether (as in a race) to­wards all that is good.”

(Al Baqarah: 18).

With pres­sure to per­form well in order to gen­er­ate profit and to com­pete, stan­dard op­er­at­ing pro­ce­dures have been set. Prod­uct pric­ing would em­bed cer­tain ex­pec­ta­tions of fu­ture in­come and ex­penses cal­cu­lated based on past ex­pe­ri­ence as well as profit fac­tor as as­sump­tions. Con­tri­bu­tions are pre-cal­cu­lated for a cer­tain amount of ben­e­fits to be payable upon mishaps. Un­der­writ­ing rules are set to avoid anti-se­lec­tion and to en­sure that only healthy in­di­vid­u­als are ac­cepted into the scheme, so as not to jeop­ar­dize the fund. Strate­gies are set and ex­pected to be ex­e­cuted. Mar­keters are em­ployed to pro­mote the prod­ucts. Tar­gets and pro­duc­tion be­come im­por­tant as a mean to mea­sure the prof­itabil­ity of the ven­ture; and so on, so forth. So, where are we now? Where are taka­ful op­er­a­tors in the eyes of Shariah? Do they still ex­ist with the pri­mary in­ten­tion of help­ing those in need, or have that in­ten­tion be­come se­condary, af­ter profit-mak­ing? Are taka­ful op­er­a­tors do­ing the right thing if profit-mak­ing is their pri­mary in­ten­tion and com­pet­ing among each other be­comes the prac­tice? These are some of the ques­tions that taka­ful op­er­a­tors need to ask them­selves, some of which will be an­swered in my next few ar­ti­cles.